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(H1) Fragile Outlook


Curve Lower, Flatter as Yields Reverse Off Cycle Highs


Yield Curve Update


Eurodollars Futures Snapshot




Probes Key Support

--Traders Also Watch Congress, Pres. Trump, Fed Actions
By Sheila Mullan
     NEW YORK  - Traders in the U.S. Treasuries next week will have lots to
focus on: the New Year and busier high-grade corporate bond issuance, the 2018
tax reforms going into action, and watching the economy and Federal Reserve
policy progress.
     Traders looked to leave early amid the short session Friday, Dec. 29th; the
U.S. cash bonds closed at 2:00 p.m. ET while the U.S. financial futures on the
CME closed at 1:00 p.m. ET.
     Next Monday, Jan. 1, will be a full U.S. government bond market holiday,
with U.S. stocks, banks and government offices also closed. But the markets and
business get right back to action on Tuesday, Jan. 2nd, with busy high-grade
corporate bond issuance eyed.
     Traders also eyed the implications of the important U.S. tax reform bill
passed by the Congress last week. "The Tax Cuts and Jobs Act will take effect
somewhat sooner than we expected, in 1Q18 instead of 2Q18," said JPM economist
Michael Feroli. "It is also somewhat larger than expected in the next few years,
before a few important measures are scheduled to sunset."
     Congress also will resume work next week, while U.S. Pres. Donald Trump
will be returning from a vacation in Florida.
     "All of us should take the quiet final session in a quiet final week for
what it is however, for next week will be very busy," said John Briggs, head of
strategy/Americas at NatWest on Friday.
     "Not only do I think markets will have their usual high level of activity
as risk appetites rev up again and as P&Ls are reset to zero, but there is a ton
of top-tier data out as well as the potential for political news if Trump kicks
the year off with a strong drive for infrastructure spending," he added.
     That is "one of the reasons I am reluctant to ride this latest leg of curve
flattening," he said. "Also, I think the front end out to the belly has enough
Fed priced in for now with about 3 hikes priced for next year" so "looking for a
further weakening of the front end here seems like poor risk-reward."
     BMO analysts Ian Lyngen and Aaron Kohli expect that the U.S. 10-year note
yield will close 2018 "at 2.40%, but not before a test of the bottom of the
recent range (2.00%) and the risk of an inverted 2s/10s curve as early as the
March meeting; if not, then by June." (That compared to the 10-year note yield
now at 2.425%).
     "While we've been focused on this risk since September 2017, when the Fed
signaled its intention to push forward despite realized inflation, it has become
increasingly consensus - a dynamic that always gets us nervous, but we're
nonetheless convinced of the fundamentals behind the call," they said. "If
anything, the newfound popularity of the forecast leaves us open to an inversion
earlier in 2018, which will subsequently be followed by a resteepening."
     They added the "more challenging call will be correctly timing the
inversion of the 5/30-year US Treasury curve. We're comfortable assuming that it
happens sometime during the next 12- to 18-months - with an acknowledgment that
the prior three occurrences came near the end of the Fed's previous hiking
cycles," they said.
     Meanwhile, the U.S. Congress had averted a government shutdown for the near
future, as it passed a continuing resolution to fund the government temporarily
until January 19.
     Meanwhile SocGen analysts Alain Bokobza, Gaelle Blanchard and Sophie Huynh
said their 2018 multi-asset portfolio calls had the idea of "be ready for the
end of Goldilocks." One key call they had was to for "exit (risk) strategies
gaining momentum in 2018" was to go: "Long 10y US Treasuries;" "Short 10-year
Bund/Long -year euro peripheral bonds;" "Long euro inflation-linked bonds;"
"Short Russell 2000 versus Eurostoxx 50," and "Long Japan equities," and "Long
Best of Value basket."
     But they did warn of risks of the "Fed, ECB, BoJ and BoE not normalizing
policy on the back of a growth slowdown."
     Traders differed on what to focus on for next year. Some cited "stubbornly
low inflation and overall levels of debt will prevent yields from rising once
again," as one put it. He noted "Amazon bought Whole Foods and cut prices 15%,"
with "more coming" to reduce inflation."
     But others said that taxes generally and the U.S. deficit will be important
to watch next year.
     And BA/ML corporate bond analysts Hans Mikkelsen, Yuri Seliger and Yunyi
Zhang projected the top 5 risks for 2018 for high-grade US dollar corporate
bonds: #1. "Foreign inflation picking up;" #2 "Increasing cost of dollar
hedging;" #3 "Macro shocks;" #4 "No tax reform;" and finally, #5 "Releveraging
event risk."
     NatWest analysts John Briggs, Brian Daingerfield and Blake Gwinn "have
turned neutral on (Treasuries) duration, from bullish. We are wary of taking too
much from market moves in holiday dampened markets."
     They also "see more corrective steepening ahead" and are "long 5s on the
curve as the belly looks cheap in our view." They are "constructive on inflation
breakevens, but would wait to seek entry for a pullback to the 1.65%-1.75%
area," they said.
     And Friday Jan. 5 brings the key December US nonfarm payroll employment
report. The MNI economist poll projects a median estimate of 190,000 vs. the
prior November 228,000 report. The poll projected medians of 185,000 December
private payroll employment, 4.1% jobless rate, a 0.3% Average Hourly Earnings
gain and 34.5 hours average hourly workweek.
     Jefferies economists Ward McCarthy and Tom Simons projected a 175,000
December jobs gain, 170,000 private payrolls gain, a 4% jobless rate and 0.3%
average hourly earnings gain. 
     And traders will watch the Saudi Arabia/Iran/Lebanon news and North Korea,
too. Also, Treasuries should see foreign exchange-tied buying by black box hedge
funds if the U.S. dollar weakens against the Japanese yen, or selling if the
dollar firms, said traders.
     The Federal Reserve also gradually is reducing its balance sheet of $4.2
trillion in U.S. Treasuries and Agency MBS.) The Fed started its taper/reduction
program in October 2017 to whittle down its huge balance sheet of bonds bought
to aid market tightness since the 2008-2009 financial crisis.
     Once tapering begins, the Treasury would have to figure out how to slice
debt issuance to cope with such a Treasuries runoff. The taper started in MBS
with the Friday Oct. 13 announcement on MBS rolldowns, and started at the end of
October in Treasuries. 
     The Open Market Desk will buy a maximum of $12.2 billion in Agency MBS from
Dec. 29, 2017-Jan. 12, 2018.
- Oct-Dec 2017.. $6 billion./$4 billion 
- Jan-Mar 2018.. $12 billion/$8 billion 
- Apr-Jun 2018 $18 billion../$12 billion 
- Jul-Sep 2018 $24 billion../$16 billion 
- From Oct 2018** $30 billion $20 billion
-- Questions? 212-669-6432; story also reflects
contributions from Giovanny Guerrero of MNI/New York.
-- A calendar of market events (data, Fed speakers) is below: 
Date/Time ET Prior Data/And MNI Econ Poll Median Estimates
- Jan1 US bond/stock markets/government holiday for New Year's Day
- Jan2 0945 *** Dec Markit Mfg Index (final) 55.0/--
- Jan2 1130 am ET US Tsy $48.0B 13-Week Bill auction
- Jan2 1130 am ET US Tsy $20.0B 52-Week Bill auction
- Jan2 1300 pm ET US Tsy $42.0B 26-Week Bill auction
- Jan2 1300 pm ET US Tsy $50.0B 4-Week Bill auction
- Jan3 *** Dec NA-made light vehicle sales SAAR 13.3M/13.4M
- Jan3 0700 ** 29-Dec MBA Mortgage Applications --/-- %
- Jan3 0855 ** 30-Dec Redbook retail sales m/m 0.1%/-- %
- Jan3 0945 * Dec ISM-NY current conditions 58.1/--
- Jan3 1000 *** Dec ISM Manufacturing Index 58.2/58.2
- Jan3 1000 * Nov construction spending 1.4%/0.7%
- Jan3 1000 * Jan help-wanted online ratio 1.14/--
- Jan3 1400 Federal Reserve release Dec 12-13 FOMC Mtg mins Washington
- Jan4 0730 * Dec challenger layoff plans 30.0/-- %
- Jan4 0815 *** Dec ADP private payrolls 190K/-- k
- Jan4 0830 ** 30-Dec Weekly initial jobless claims 245K/240K
- Jan4 0945 *** Dec Markit Services Index (final) 52.4/--
- Jan4 0945 * 31-Dec Bloomberg comfort index 52.4/--
- Jan4 1030 ** 29-Dec natural gas stocks w/w --/-- Bcf
- Jan4 1100 ** 29-Dec crude oil stocks ex. SPR w/w --/-- m bbl
- Jan4 1330 StL Fed Bullard On Econ/Mon Pol at Meltzer conf; Phil Q/A
- Jan4 1630 ** 03-Jan Fed weekly securities holdings --/-- t USD
- Jan5 0830 *** Dec US nonfarm payroll employment 228K/190k
- Jan5 0830 *** Dec US private payroll employment 221K/185k
- Jan5 0830 *** Dec US unemployment rate 4.1%/4.1%
- Jan5 0830 *** Dec US average hourly earnings 0.2%/0.3%
- Jan5 0830 *** Dec US average workweek, all workers 34.5/34.5 hrs
- Jan5 0830 ** Nov trade balance -$48.7B/-$48.3B
- Jan5 1000 *** Dec ISM Non-manufacturing Index 57.4/57.8
- Jan5 1000 ** Nov factory new orders -0.1%/1.0%
- Jan5 1000 ** Nov factory orders ex transport 0.8%/-- %
- Jan5 1015 Phil Fed Harker on Econ Outlk: AEA/ASSA Mtg; Phila; Q/A
- Jan5 1030 Clvld Fed Mester: MonPol/Macroecon Stab ASSA mtg Phila Q/A
- Jan5 1100 ** Q1 St. Louis Fed Real GDP Nowcast --/--%
- Jan5 1115 ** Q1 NY Fed GDP Nowcast --%/--%
- Jan5 1500 * Dec Treasury STRIPS Holdings --/-- b USD
- Jan6 1015 Clevld Fed Mester on Fincl Stab/Mon Pol:ASSA mtg; Phila Q/A
- Jan6 1015 NY Fed EVP Potter:"Safe Assets Shortage" ASSA/AEA Phil Q/A
     - Jan7 0800 SF Fed Williams:paper session Derivs/Lower Bound; Phila Q/A
--MNI New York Bureau; tel: +1 212-669-6432; email: